VCs say recipe-in-a-box biz will deliver billions

Blue Apron, led by founder and CEO Matt Salzberg, is among a growing trend of recipe-in-a-box startups.

CN9620496.MP3

This Week in Crain's: September 8, 2014

Your browser does not support the audio element.

Best Meal Deal

Blue Apron claisms its meal-ingredient service not only delivers tasty dinners to families, but savings as well. Crain's selected a recipe for a dinner for two at random and then shopped for the same type and size of ingredients at three of New York city's top grocery chains. Here's what we came up with.

Some of New York City's biggest venture capitalists have invested more than $115 million since April in three Silicon Alley startups.

But it stands to reason that some of these investors will come away empty-handed, especially when one considers that all three startups do essentially the same thing: deliver refrigerated boxes filled with the ingredients of a full-blown meal to subscribers who pay monthly or annual fees.

Blue Apron bagged $50 million in April. Its SoHo neighbor HelloFresh grabbed $50 million in June, while West Village-based upstart Plated pulled down $15 million in early August.

All three cater to the same niche of consumers who are short on time but long on disposable income. Because these startups share the same revenue model, some Silicon Alley observers are looking at the recent flurry of investment as the pumping up of a mini-bubble in the ingredients-in-a-box business.

"There's a line of argument that goes: The grocery industry is hundreds of billions a year, and disrupting it is therefore a huge opportunity," said Greg Sterling, a tech analyst and vice president of strategy and insights for the Local Search Association, an online advertising industry group. "That might very well be true, but it seems like there's something excessive going on here."

The U.S. grocery industry is indeed a pretty meaty target for startups. With roughly $600 billion in annual revenue—almost 70% of which is generated by mega-chain corporations like Kroger and Safeway—and a business model that remains largely analog, supermarket customers in the digital age are seemingly ripe for the picking.

Blue Apron, HelloFresh, Plated and their investors see ample opportunity to carve out their own place within the industry by offering recipe kits filled with healthy, sustainably farmed food for less than the cost of buying the ingredients on your own. And that's without factoring the savings in time, they say.

Blue Apron is the leader in this group. Founded in 2012, it was the first to market with the concept, which took off in big cities with busy professionals who like the idea of eating a home-cooked meal but don't have time to shop for ingredients. The company saw sales hit the $3 million mark in 2013. It is projecting revenue in the neighborhood of $70 million for 2014.

"We're the only company who does what we do at scale," said Blue Apron founder and CEO Matt Salzberg, a 2014 Crain's 40 Under 40. "Especially in terms of quality. Our fully integrated supply chain lets us buy items seasonally and manage our supply chain intelligently, allowing people to get farm-fresh foods at substantially lower prices than supermarkets."

Mr. Salzberg claims that Blue Apron's prices undercut the average supermarket by almost 50%, a reduction that he says is augmented by the time saved in shopping for them.

But observers disagree on how big the market is for these products. While it might make perfect sense for a single Goldman Sachs analyst to make sure the fixings for chicken paillard with quinoa salad is waiting for him at his studio apartment on a Wednesday evening, the cost savings on individual Blue Apron meals do not financially play out for a family of five looking to plan a week of meals on a budget.

Limited appeal

"Immediately, I think, that works in Manhattan and places like it," said Mr. Sterling. "But there just isn't enough demand outside major cities to make it nationally in this industry."

All three startups operate on both coasts and parts of the Midwest, but the recipe-box business is virtually nonexistent elsewhere. HelloFresh is the only one of the three with operations in Europe. All put particular focus on major metropolitan areas, where the real battle for market share is taking place.

"Consider the dollars spent for every meal that aren't spent at a restaurant. That's clearly a huge market," said Charlie O'Donnell, a partner at Brooklyn Bridge Ventures. "But unless you're growing the market ... you've got to question the market-size projections."

FreshDirect responds

Competition for market share in New York is hot. In early August, online grocer FreshDirect announced it had struck an exclusive deal with social recipe website Foodily, creating another competitor called Popcart. The app will allow users to browse recipes on Foodily's platform and then click through to order the listed ingredients directly from FreshDirect, which already delivers on the premium of time saved and will be able to draw on its existing customer base.

When announcing Popcart, a FreshDirect spokeswoman said in a press release that the app would distinguish itself from competitors by also being a platform for all grocery needs. "Think about that opportunity," she said.

For investors like Mr. O'Donnell, the type of new player represented by Popcart is the perfect example of why all this new investment in recipe boxes is potentially troubling.

"I'm generally skeptical about spending a lot of money too early because you're not sure yet who your customers are," he said. "The potential problem is that you grow too fast before you realize those early customers are churning out and not being replaced."

Mr. Salzberg said that the new entrants will force companies like his to step up their game. "There is definitely more competition," he said. "But it's up to us to present a truly differential value to our customers."

Crain’s New York Business is the trusted voice of the New York business community—connecting businesses across the five boroughs by providing analysis and opinion on how to navigate New York’s complex business and political landscape.